Exchange Rate Policy Research Articles

Investment response to exchange rate uncertainty: Evidence from Chinese exporters

This paper empirically examines the impact of exchange rate uncertainty on firm-level investment using data collected from the incidence of an exogenous uncertainty shock caused by the 2005 change in China's exchange rate policy. The results show that the higher RMB exchange rate uncertainty induced by the policy change significantly weakened Chinese exporters' response of investment to demand shocks. Moreover, exporters with higher degrees of capital irreversibility were found to be more sensitive to the uncertainty shock, which is consistent with the capital irreversibility hypothesis that has been identified in the macroeconomic literature. This paper also documents heterogenous investment responses to uncertainty across firms.

Agricultural land consolidation, labor allocation and land productivity: A case study of plot exchange policy in Vietnam

Studies on the impacts of agricultural land consolidation have mostly used the household plot number as a proxy. Instead, this study exploits the variation in household participation in plot exchange, a policy for consolidating cropland in Vietnam, to evaluate the impacts of land consolidation on household labor allocation and farmland productivity. Using data from the Vietnam Access to Resources Household Survey (VARHS), we construct a panel household dataset from 2010 to 2016. This sample consists of 618 households in two provinces, Ha Tay and Nghe An, where plot exchange was implemented intensively in the period of study. We apply two-way fixed effects regression to mitigate the endogeneity in household participation in plot exchange. The results indicate that plot exchange halved the number of household plots dedicated to annual crop production. While the impact on land productivity was statistically insignificant, land consolidation via plot exchange dramatically reduced household labor allocated to crop production, especially rice production. Further analyses reveal that the labor effects may come from improved farm irrigation and increased machine rentals.

Asymmetrical Effects of Real Exchange Rate Volatility during Covid-19 Pandemic on the Demand for Money in Zimbabwe

The understanding of symmetrical or asymmetrical effects of exchange rate volatility improves the effectiveness of macroeconomic management policies. This study examines the long-run asymmetrical effects of exchange rate volatility on real demand for money in Zimbabwe, using monthly data from January 2018 to September 2020. Exchange rate shocks are calculated by decomposing exchange rate volatility measure into positive and negative components to examine their short-run and long-run effects and to determine whether the long-run effects of the components of exchange rate movements are symmetrical or asymmetrical. The linear ARDL and the non-linear ARDL models are estimated. The study employs the F-bounds test to confirm the longrun relationship and the Wald test for the asymmetrical effect. The results show that exchange rate depreciation in Zimbabwe has symmetrical effects on real demand for money. Thus, exchange rate policies in Zimbabwe should assume linearity in the passthrough effects on real demand for money.
 JEL Classification: E41; E52; E6

Nexus Between Real Exchange Rate Misalignment and Economic Growth: A Case of Pakistan

This study investigates the nexus between real effective exchange rate (REER) misalignment and the economic growth of Pakistan. It relies on a single equation model for estimating equilibrium exchange rate using the autoregressive distributive lags (ARDL) approach. The study further uses the growth equation to explore the effects of misalignment of RER on growth proxies. The data were obtained from the official websites of the World development indicator, IMF, Penn World Table, Pakistan Bureau of Statistics, and Ministry of Finance Pakistan. In terms of trade, the data was available on three different bases in different editions of the economic survey of Pakistan. All unit values of imports and exports were changed as per new base 1991 so that the data from editions of survey becomes uniform. The study takes data from 1970 to 2020. The study findings show that gross capital formation, trade openness, and government spending have a substantial role in defining the equilibrium REER. The findings also identify a positive and significant effect of REER misalignment on the economic growth of Pakistan. This paper contributes by measuring the degree of misalignment of real exchange rates using the single equation approach which is rare in the case of Pakistani literature. The single equation approach not only measures the misalignment by PPP factor but also considers basic economic fundamentals such as trade openness, terms of trade, productivity differentials etc. The study further provides evidence of misalignment with economic growth over a longer period (1970-2020). The findings suggest the effective use of exchange rate policy to control exchange rate misalignment to get higher and more sustainable economic growth. The study is useful for policymakers in the long-term economic planning of Pakistan. The results can be generalized for other economies with similar features.

Ahmadov V.

This paper evaluates the financial policy of oil-exporting Azerbaijan in the recent oil boom and bust period. Analysis of fiscal policy evaluates the fiscal sustainability and efficiency of government spending to upgrade domestic economy. Monetary policy evaluation measures the effect of the exchange rate policy on competitiveness of non-oil economy and capacity of Azerbaijan government to sustain macroeconomic stability in the oil-shock period. The share of the oil revenue in government budget increased significantly, and budget spending is directed to physical investment while investment in human capital in the form of health, education and social spending lagged behind. Aside from currency crises in 2015, macroeconomic stability has been under control, but fixed exchange rate policy impeded the competitiveness of non-oil sector and caused Dutch disease.

Accounting for real exchange rates in emerging economies: The role of commodity prices

A puzzling feature of international price data is that real exchange rates are much more volatile than macroeconomic fundamentals. This study empirically disaggregates international prices into their component parts to examine the key sources of high real exchange rate volatility with emphasis on Emerging Market Economies (EMEs). Using quarterly data over 1985–2015 for 28 countries, we document that 1) relative tradeable goods prices account for most of the observed volatility, 2) world commodity prices explain about 30% of real exchange rate fluctuations, and 3) commodity price shocks are associated with large and persistent real exchange rate appreciations in EMEs. Our results underscore the importance of commodity prices for the conduct of exchange-rate policy in EMEs.

Currency Crisis in South Sudan: Contexts, Causes and Policy Options

This study combines contextual framework, review of South Sudan elites’speculative policies and empirical evidence between July 2011 to December 2017to explain the causes of the exchange rate crisis in South Sudan. The study findselites' speculative policies and a surging money supply caused the depreciation ofthe exchange rate. The study argues that policymakers implemented unsustainablepolicies, and speculative regulations in the financial sector as conduits for the elitesto benefit through rent-seeking. Disabled by ineffective monetary and exchangerate transmission channels, the Bank of South Sudan signaled its inability to defendthe fixed exchange rate in November 2013 by devaluing the pound. Politics came inthe way, the devaluation was rescinded by parliament in December 2013. Thedevaluation was later implemented in December 2015 at a higher exchange ratewhen the Bank of South Sudan surrendered to defending a fixed exchange rateregime. South Sudan's macroeconomic environment is characterized byhyperinflation, depreciation and lack of political will to ensure good economicgovernance prevails. Resolving macroeconomic challenges of such magnitude,requires external policy and financial support for the Bank of South Sudan tocorrect the exchange rate and monetary policy challenges.

Russian meat price transmission and policy interventions in 2014

This article investigates price relationships in the Russian meat markets in 2011–2017. We use vector autoregression specifications to predict the transmission between consumer, producer, and import prices in the Russian pork, beef, and poultry markets. We consider the possible effects of substitution (between domestic product and import as well as between products in domestic markets), market protection in meat markets, short-term exchange rate policy, and trade price incentives. Our results suggest that meat producer prices responded to import prices, but not vice versa. Poultry and pork producers responded to all market protection measures—the ban of pork imports from the EU and the food embargo. Beef producer prices responded to the embargo. We also find that the single meat market segments may help predict price effects for substitutes. For instance, we find that the poultry consumer prices responded to consumer price changes in the beef and pork markets owing to assumed demand redistribution, but—in contrast to beef and pork—poultry consumer prices were not correlated with the lagged import and producer prices.

Review: Enemies among Us: The Relocation, Internment, and Repatriation of German, Italian, and Japanese Americans during the Second World War, by John E. Schmitz

Review: Enemies among Us: The Relocation, Internment, and Repatriation of German, Italian, and Japanese Americans during the Second World War, by John E. Schmitz

Policy uncertainty in Japan

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards, building on Baker et al. (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters, and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates, and interest rates and with a survey-based measure of political uncertainty. It rises around contested national elections and major leadership transitions in Japan, during the Asian financial crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, the deferral of a consumption tax hike, and the onset of the COVID-19 pandemic. Our uncertainty indices for fiscal, monetary, trade, and exchange rate policy co-vary positively but also display distinct dynamics. For example, our trade policy uncertainty (TPU) index rocketed upwards when the U.S. withdrew from the Trans-Pacific Partnership. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan's macroeconomic performance, as reflected by impulse response functions for investment, employment, and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by reducing policy uncertainty.

Exchange Rate Fluctuations and Economic Growth in Nigeria (1981 – 2020)

This study examined the relationship between exchange rate and economic growth in Nigeria between 1981 and 2020. The specific objectives are to determine the effects of exchange rate, inflation and interest rate on gross domestic product (GDP). The data on the variables were obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin and World Development Indicators, and analyzed using descriptive statistics, unit root as well as bounds cointegration tests and ARDL model. The unit root test results showed that the variables are mixed integrated. While inflation is stationary at levels, the other variables in the model were stationary at first difference. The bounds cointegration test showed that long run relationship exists between GDP growth and the underlying explanatory variables. The findings showed that exchange rate and inflation negatively impacted on economic growth. This finding indicates that increase in exchange rate and price level is detrimental to the growth of the Nigerian economy. There is evidence of a significant positive effect of interest rate on GDP growth. This finding explains the reality in Nigeria, where businesses and households tend to borrow even as interest rate increases, but tend to cut corners by reducing the quality of their products and services or pass-on the increased costs of borrowing to consumers by increasing prices. Given the findings, this study recommends amongst others that the federal government through the CBN should ensure that exchange rate policy should is consistent to provide opportunity for a realistic and stable exchange rate capable of driving economic growth in Nigeria.

Foreign exchange intervention for commodity booms and busts

While the conventional policy prescription for dealing with commodity price shocks is the adoption of a flexible exchange rate regime, a view popularized by Friedman (1953), in practice many emerging economies decide to intervene in the foreign exchange market. In this paper, we evaluate the optimal exchange rate policy response to commodity price shocks in a small open economy model with learning-by-doing (LBD) externalities. We find that the optimal policy response to a commodity boom involves a large and sustained increase in the stock of foreign exchange reserves aimed at stabilizing the real exchange rate and tradable production. Moreover, the optimal policy resembles the actual dynamics of foreign exchange reserves observed in many emerging commodity-exporting economies during recent episodes of commodity booms. We also show that solely relying on monetary policy for dealing with commodity price shocks provides limited macroeconomic stabilization gains, as the policy rate is an ineffective instrument for addressing LBD externalities.

EFFECT OF INSUFFICIENT CURRENCY IN CIRCULATION ON THE RATE OF INFLATION AND UNEMPLOYMENT IN NIGERIA: THE BUHARI’S ADMINISTRATION EXPERIENCE

This study investigated the effect of insufficient currency in circulation on the rate of inflation and unemployment in Nigeria: The Buhari’s Administration Experience; using annual time-series data ranging from 1985 to 2020. In achieving this task, the study was disaggregated into two models: model 1 utilizing Vector Error Correction Model to analyse the relationship between fiscal variables (government total expenditure, government tax revenue, and export) and unemployment rate. It was revealed from the unit root of Augmented Dickey-Fuller test that none of the (fiscal) variables was stationary at level, but they were all stationary after 1st Differencing. This made it necessary for the study to apply Johansen co-integration test which the estimated result indicated 1 co-integration equation as evidenced by Trace statistic. This also, necessitated the application of Vector Error Correction Model (VECM), and it was observed that it took 61.71% annual speed of adjustment towards long-run equilibrium from short-run disequilibrium for unemployment rate to return to equilibrium after a shock to fiscal variables. The results further explained that government total expenditure, and government tax revenue, had negative and insignificant impact on unemployment rate respectively, thereby reducing unemployment rate. Similarly, the estimated result indicated that export had positive impact on unemployment thereby increasing unemployment rate within the period under study. Similarly, in analysing monetary variables (money supply, exchange rate and prime lending rate) in model 2: Phillip-Peron unit root test was conducted and it was confirmed that the variables were of mixed order of integration which necessitated the employment of ARDL technique. The ARDL bounds testing result revealed that a long-run relationship existed between monetary variables, and inflation. It was found, in the long-run, that money supply caused inflation rate to rise. More so, the result further revealed that present level of exchange rate decelerated inflation rate in both long-run and short-run. While, it was further observed that the one-year lag and two-year lag of exchange rate increased rate of inflation in both log-run and short-run respectively. The estimated result further revealed that the present level of prime lending rate minimised the rate of inflation in the long-run and short-run. Whereas, similar results were further confirmed in the one-year lag and two-year lag that prime lending rate reduced inflation rate in both log-run and short-run. As a result of these findings, with respect to model 1; the study recommended that government should maintain the level of its expenditure and tax revenue as this reduced unemployment rate, and it should lower trade costs so that demand for labour would increase in the export industry, this would make aggregate unemployment rate to reduce. With respect to model 2; it recommended the adoption of contractionary monetary policy that would minimise the amount of money supply that caused long-run effect on inflation in the system. Furthermore, there should be proper maintenance of fixed exchange rate policy that will make exchange rate regime overcome non-military forces of demand and supply in exchange rate market, this will help maintain low rate of inflation.

Exchange Rate Dynamics, Energy Consumption, and Sustainable Environment in Pakistan: New Evidence From Nonlinear ARDL Cointegration

Pakistan's local currency has been devalued during different exchange regimes, which may substantially affect energy consumption and CO2 emissions. Therefore, this study investigates the effects of exchange rate depreciation on Pakistan's CO2 emissions and energy consumption from 1990–2018. We apply the nonlinear autoregressive distributed lag (ARDL) cointegration approach for the empirical analysis and found that exchange rate depreciation increases CO2 emissions and energy consumption in both the short and long runs. These results suggest that currency devaluation has an expansionary effect which enhances economic growth at the cost of high energy consumption and CO2 emissions. Therefore, the government needs regulations along with an exchange rate policy to control CO2 emissions. Moreover, the government should search for alternate energy resources such as renewable energy resources that meet the country's energy needs and mitigate CO2 emissions.

Inflacija i politika deviznog kursa - efekti na spoljnotrgovinsku razmenu Republike Srbije - trgovinskopravni i ekonomski aspekt - perspektive i budućnost poslovanja

The process of globalization, deregulation and liberalization of the market, international dominance has several significant aspects, first of all, taking into account the turbulence, complexity and uncertainty of business as well as the application of regulations subject to change, which has significant negative implications of all types of economic policy of the domicile country, but also a dominant influence international institutions. As economic policy through price (inflation) and exchange rate policy has a significant impact on foreign trade exchange and trade contracts in legal transactions through the positioning, competitiveness, growth and development of the Republic of Serbia both on the domestic and international markets, where the so-called of the principle of "victory of the stronger", the influence of imperialist forces, political influence and world oligarchy should be considered in the context of the future and the perspective and future of business of domestic companies as well as the economic policy itself. Therefore, the goal of this work is to connect knowledge from the legal and economic domains, to focus on the eff ECT of inflation and exchange rate policy and their influence in foreign trade exchange and international financial headquarters as challenges facing science and the profession, bearing in mind all the implications that have been stated and they are of crucial importance for the future of international business.

Inflation Dynamics and Food Prices in Hungarian Agricultural Economy

During 2021-2022, many commodity prices rose to record levels. As a result, Hungary in 2022 experiencing high inflation, large trade deficits, and an unstable macroeconomic environment. High commodity prices, particularly for food, also have adverse effects on poverty. Hungary has not experienced for a long time such increase in inflation, which is among the highest in Europe. Inflation growth has recently associated with large energy price shocks, food price increases are traditionally believed to have rather small effects. At the same time, there has been an absence of rigorous work to identify empirically the relative importance of each factor contributing to inflation. It is thus of vital importance to improve the understanding of the causes of inflation in Hungary to allow adequate policies to be put in place. The purpose of this paper is to fill this gap and thoroughly analyze the determinants of inflation in Hungary using data for the current decade, with a focus on food prices. The authors identify the relative importance of several factors contributing to overall inflation and its major components. The main finding is that, in a longer perspective, one of the main factors that determine domestic inflation are the food prices. In the short run, agricultural supply shocks strongly affect domestic inflation, causing large deviations from long-run price trends. The results suggest the need for a multi-pronged approach to fight inflation. This analysis suggest monetary and exchange rate policies need to take into account agricultural production, which is among the key determinants of inflation. Moreover it has a greater influence on inflation than is widely known.

РЕЖИМ ВАЛЮТНОГО КУРСУ ЯК ОБ’ЄКТ РЕГУЛЯТОРНОЇ ПОЛІТИКИ ДЕРЖАВИ В УМОВАХ ВІДКРИТОСТІ НАЦІОНАЛЬНОЇ ЕКОНОМІКИ

The article summarizes the patterns of development of exchange rate policy in Ukraine as the transition from administrative to economic methods of regulating the foreign exchange market in the process of increasing the degree of its liberalization. It is shown that the evolution of the exchange rate regime is described by the following chain: fixed, currency corridor, flexible, adjustable-floating, floating. The change in the objects of monetary targeting took place in the following sequence: credit channel, monetary aggregates, exchange rate, inflation. The main task of the NBU's exchange rate policy is to ensure price stability, and an additional one is the impact on the hryvnia exchange rate. It is determined that currently the main instrument of the NBU's monetary policy is the interest rate, and foreign exchange interventions are ancillary to the inflation targeting and floating exchange rate, which acts as a compensator for negative foreign exchange shocks and supports the competitiveness of producers. It is shown that within the current exchange rate regime in Ukraine foreign exchange interventions are carried out on the principles of reducing the role, scale and frequency as the currency market is liberalized, non-interference in its fundamental trends, priority of foreign exchange demand by foreign exchange market participants. and transparency of the criteria for the participation of entities in auctions and bidding. It is argued that the purpose of foreign exchange interventions is: replenishment of official foreign exchange reserves, smoothing the shortcomings of the foreign exchange market in case of its limited ability to self-regulate, loss of benchmarks for pricing, high exchange rate volatility, which negatively affects the currency security of the state and businesses. It is established that between foreign exchange interventions and the interest rate there is a transmission mechanism to strengthen the main instrument in regulating the foreign exchange and monetary markets on the principles of effectiveness of its consequences for the economy in case of adequate perception of NBU signals.

ПРОБЛЕМИ ТА ПЕРСПЕКТИВИ ПРИЄДНАННЯ УКРАЇНИ ДО ЄВРОПЕЙСЬКОГО ВАЛЮТНОГО СОЮЗУ

The main purpose of the article is the study of current issues of monetary integration of Ukraine into the European Monetary Union. Since Ukraine became a candidate country for joining the European Union on June 23, 2022, a detailed study of the prospects for currency integration has become an extremely urgent issue. This study reveals the main theoretical approaches to the interpretation of the concept of "currency union"; examines the elements on which the European Monetary Union is built; factors affecting integration; and identifies the main problems that block the currency integration of Ukraine, namely the incomplete legal framework and currency exchange rate policy. In the light of these problems, we analyzed the changes that took place in the currency market of Ukraine from the beginning of independence to the beginning of a full-scale war. It is worth noting that every year Ukraine took a number of steps that clearly brought us closer to European standards, but with the beginning of Russia's invasion of the territory of Ukraine, the situation changed significantly: the currency policy changed from liberalization to strict restrictions and control. Such changes were provoked by the beginning of the war and are of a forced nature, because without their introduction it would not be possible to maintain the functioning of the Ukrainian economy at an acceptable level sufficient to ensure the activities of individuals and legal entities, as well as the state's performance of its direct functions, especially the defense function. At the same time, Ukraine continues to strive for integration with the EU, although this is not an easy task in the conditions of martial law. However, it is worth noting that the currency integration of Ukraine with the European Monetary Union is quite promising, at the same time very long-term since this kind of integration takes place only at the highest level of harmonization of currency policies. At the same time, the positive effect for Ukraine consists in ensuring the achievement of both economic and social growth. Also, rapprochement with the EU will help Ukraine to pass the period of post-war reconstruction of the Ukrainian economy and the state more easily in general. Hypothesis. We assumed that with the start of the war, in the short term, the chances of Ukraine joining the European Monetary System would decrease, but in the long term, on the contrary, they would increase. Research methodology. The basis of this scientific research is the work of domestic and foreign scientists who studied the European currency system. At the same time, we used three main methods: analysis, synthesis and systematization. The analysis and systematization made it possible to single out the factors that will contribute to Ukraine's successful accession to the European Monetary Union. The use of a logical method and a systematic approach helped to analyze and summarize the situation on the foreign exchange market of Ukraine, as well as to make generalized recommendations for improving the situation on this market. Findings. This study made it possible to assume that Ukraine's accession to the European Monetary Union is possible, but only in the long term. At the same time, it is worth noting that such integration will have a positive impact on the economy of Ukraine.

Perspective of an exchange rate policy for global financial systems: evidence between China and ASEAN countries

Perspective of an exchange rate policy for global financial systems: evidence between China and ASEAN countries

Exchange Rate Policy Regimes, Private Investment Behaviour and Economic Growth in Nigeria (1960 -2020)

To improve economic growth acceleration, the Nigerian government should continue to formulate and implement several policies including exchange rate policy regimes. Exchange rate policy regime of any government could be a fixed exchange rate regime when the price of a country’s currency in terms of another country’s currency is fixed to a value by the monetary authority; it could be a floating regime when the price of a country’s currency in terms of another country’s currency is left to be determined by the forces of demand and supply, while a managed-floating regime is undertaken when there is an element of both fixed and floating regimes. Following the Barro (1990) theoretical framework, this study attempted to assess the effects each exchange rate regime has on the economy through the mechanism of private investment spending. The researcher carefully selected macroeconomic variables that have been considered in the econometric models for empirical analysis of the research study in this dissertation through statistical estimation techniques as guided by Barro (1990) and international studies, specifically that of Sahoo et al., (2012), in this area of study. These variables include GDP as an indicator for economic growth, Private capital, private sector credit, real exchange rate, interest rate, government capital expenditure, trade openness, exchange rate regimes dummies, total employment, and spending on health and education. Specifically, the study set out to empirically quantify the impact of both fixed and floating regimes on private investment spending and in turn, on economic growth in Nigeria.Through this study, the key determinants of private investment spending and economic growth in Nigeria. To achieve the study’s objectives and address the respective research questions, preliminary examinations of the data were conducted through the use of visual and unit root tests and some of the variables were found to be stationary at levels (i.e., 𝐼(0)) while some are stationary in their first differences (i.e., 𝐼(1)). The study proceeded to estimate both private investment and economic growth models simultaneously using Two-Stage Least Squares (TSLS) method.